Businesses and financial advisors should both plan with the end in mind, said Tom Deans, president of Détente Financial Corporation in Canada. Deans was speaking at the Discovery Financial Planning Summit in Sandton on Thursday 15 May 2014.
“Most small and medium businesses will transition without a plan,” he said. “Over 125 million American adults have no legal will. Intestacy rates are around 50% in virtually every country I’ve ever travelled in,” he said.
Intestacy was not only a consequence of poverty and poor education, he said. Four US presidents died without a will, although two of them were lawyers. “Wills are about taking care of people when you can’t.”
Family ownership is the most predominant business form, with around 90% of companies falling into this category. “Dozens of family business books are written each year, and they all have the same narrative – that the successful family business is an old business. And that’s a dangerous narrative,” he said. Founders frequently spent more time on their business than with their family, and passing on the business to the next generation felt like the most important thing. The majority of their wealth was tied up in the business, yet they were paralysed by planning and pushed away thoughts of ageing or death.
Yet the statistics showed that only three percent of family businesses would survive to the third generation, with a 70% failure rate in the second generation. “You’ve got the idea that your legacy will be your business, and is the greatest thing you can pass on. There is no more dangerous idea,” he said.
It was time for a new conversation around asset protection. Few advisors talked about protecting wealth, transition planning, wills, and liquidising assets, yet this was where they could earn the most trust from their clients.
Deans drew on his family’s experience of starting businesses, leading them and selling them, over three generations, to illustrate how succession planning and effective transitions can empower business owners and heirs. His family had founded, operated and sold their businesses for a combined value which exceeded $100 million, and held annual family meetings where they discussed their operating businesses, their share performance, and their succession plans. Deans himself attended his first family meeting at the age of five, and received a will for his eighteenth birthday. He pleaded with advisors to “write those wills, share those wills,” and discuss what they contained in their own businesses as well as with their clients.
Family businesses should never be gifted. Instead, founders should ask their children whether they were interested in buying into the business – perhaps with a loan from the company. If the response was negative, the business should be sold and the wealth transferred in the will.
“Wealth will release potential or accelerate demise. But wealth never equivocates,” he said.
Businesses are not built to last. They were temporary and frail and changed from year to year. While every entrepreneur thought they would weather the fluctuations of the market, every industry experienced revolutions. From the beginning, founders should consider selling – perhaps to a relative or an associate – and make plans for the transition. “Start with the end in mind,” he said.
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Discovery Limited is a South African-founded financial services organisation that operates in the healthcare, life assurance, short-term insurance, savings and investment products and wellness markets. Founded in 1992 by the current Group Chief Executive Officer Adrian Gore, Discovery was guided by a clear core purpose – to make people healthier and to enhance and protect their lives. Underpinning this core purpose is the belief that through innovation Discovery can be a powerful market disruptor.
The company, with headquarters in Johannesburg, South Africa, has expanded its operations globally and currently serves over seven million clients across South Africa, the United Kingdom, the United States, China and Singapore. Vitality, Discovery’s wellness programme, is the world’s largest scientific, incentive-based wellness solution for individuals and corporates. The global Vitality membership base now exceeds 5.5 million lives in five markets.
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